Trans-Share Case Study: An Analysis of Accounting Practices Before the Company Goes Public
It is an exciting day for Trans-Share. The opportunity to finally go public has come, but with it are a number of very important decisions the organization must make about its operational procedures. It is important for companies to work out the kinks of its financial reporting before the organization goes public, which makes the accounting situation much more complicated. As such, it is recommended that Trans-Share review its current financial reporting methods in order to determine if they are the most efficient.
After reviewing the case study, it can be assumed that it is best that the fractional interest program be accounted for immediately as a sale, and not a lease. The processes for accounting leases simply do not fit the needs of the organization best. Some adjustments are needed, but an entire overhaul of the accounting policy is not necessary. The case study suggests that "typically the company will realize a profit on the initial sale of the fractional interest because the sales price provided in the contract for the fractional interest would exceed the cost of that proportion of the aircraft" (Hawkins, 2001, p 3). As such, fractional interest should be accounted for as a sale, and not a lease, in the journal entries of the financial ledger. Moreover, the customer is not leasing a single individual aircraft, but rather access to aircraft services. As such, it is not a typical lease, where customer would be fleecing a single product. Instead, "for approximately every four aircraft sold, a fit aircraft is kept available to be able to meet customer demand (that is, so that there will be an aircraft available when different customers require transportation services at the same time)" (Hawkins, 2001, p 3). If the client was working with a very particular airplane, and no others, it could be reassessed as a potential lease. However, the fact is Trans-Share provides services, rather than leasing individual aircraft units. These services include the right to use aircraft of particular size based on the elements within the contract written at the beginning of the business relationship. As such, it is best for the company to go with the first option, with "revenue attributable to the initial sale of the fractional interest" being "recognized at the time of sale" (Hawkins, 2000, p 3). Accounting for the fractional interest of the lease would only complicate accounting procedures, and require a complete overhaul of the accounting system, which in this case is not necessary.
Next, the concept of using multiple deliverables needs to be evaluated in order to provide for the best way to account for revenue streams. It is clear that there are multiple deliverables present within the operations of Trans-Share. It is important to deal with each individual deliverable sufficiently and in a way that does not underestimated by putting in a category with other deliverables that are not under the same financial recording processes. The company should continue to hold its fractional interest program in cohesion with the Financial Accounting Standards Emerging Issues Task Force (EITF) No. 00-21, which deals with accounting arrangements with multiple deliverables. Under this guideline, revenue streams within a foundation that deals with multiple deliverables should focus on accounting for each stream individually, and separate from other related transactions (FASB ASC 840-10-25-35). Working with this as the primary foundation for reporting practices in the accounting policies would also help streamline all changes being made to the reporting process. Completely reworking the accounting practices would be a nightmare for the company, complicating issues way too much before it goes public. However, slightly adjusting revenue arrangements under the guidance of the EITF regulation can help minimize the amount of change necessary, while still optimizing the efficiency of that change. It helps provide a strong foundation with the uniform set of practices that will streamline the accounting process when the company goes public. As such, the fractional interest program should be considered as "a multiple deliverable arrangement that should be accounted for in accordance with Securities and Exchange Commission staff" because revenue from three separate revenue models is immediately being recognized (Hawkins, 2001, p 3). Essentially, there are three separate transactions that take place during one client interaction within the revenue model that the organization should set up. First, there is the initial sale of the interest related to the particular aircraft in question. Then there is also a maintenance…